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Decomposing supply- and demand-driven inflation in Turkey

Author

Listed:
  • Okan Akarsu

    (Central Bank of the Republic of Türkiye, CBRT)

  • Emrehan Aktuğ

    (Sabancı University)

Abstract

We document the demand- and supply-driven components of inflation in Türkiye by following the decomposition method of Shapiro (J Money Credit Bank, 2024). The results suggest that the recent surge in inflation, which began with the COVID-19 pandemic and deviated significantly from global inflation rates, reaching as high as 80%, was initially driven by supply factors. As monetary policy loosened, demand-driven inflation also increased; however, throughout the post-COVID period, supply-driven inflation consistently exceeded the demand-driven component in this high-inflation environment. Consistent with theory, oil supply and exchange-rate shocks increased the supply-driven inflation, while monetary policy tightening reduced the demand-driven inflation. This decomposition can potentially serve as a useful real-time tracker for policymakers.

Suggested Citation

  • Okan Akarsu & Emrehan Aktuğ, 2025. "Decomposing supply- and demand-driven inflation in Turkey," Empirical Economics, Springer, vol. 69(2), pages 1047-1077, August.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:2:d:10.1007_s00181-025-02754-9
    DOI: 10.1007/s00181-025-02754-9
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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